Diary of a Professional Commodity Trader: Lessons from 21 Weeks of Real Trading_8

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Diary of a Professional Commodity Trader: Lessons from 21 Weeks of Real Trading_8 Being wrong on 91 percent of trades over a series of 27trading events reaches the outer extreme of a bell curvedistribution. The standard deviation of this occurrence isquite extraordinary. But it is explainable. The reason is thatthe distribution of profitable and unprofitable commodityand forex trades in a data set is not random in the way cointosses or dice rolls are random. Dice and coins do nothave emotions. Traders do! My recent losing streak included some self-defeatingtrading practices, which skewed the statistical probability ofrandomized results. Getting spooked by markets can leadto defensive trading practices that can prolong a tradingdrawdown. So, how exactly does this work? The hardest trades to emotionally execute for adiscretionary trader—trades for which every cell in atrader’s body screams to avoid—are often the best trades.In contrast, trades that are emotionally easy to execute areoften trades consistent with the conventional wisdom of themarketplace. Conventional wisdom is usually wrong. Duringa losing streak, a discretionary trader (as opposed to asystematic trader) can revert, at least subconsciously, tothose trades that seem safe. Nearly every losing tradeduring the recent string developed an immediate profit.From time to time over the years, I have toyed with the ideaof grabbing a quick $500 to $1,000 per contract profit andwalking away from trades. The analysis of my trading in October and November (notshown in this book) revealed too many trading events. I hadbecome too short term in my market analysis and wasoverreaching for trades that I should not have taken. Excessive market activity on my part is normally linked tothree types of trading events: 1. Too many major pattern anticipatory signals in an attempt to pre-position for a major breakout that may never occur. Weekly chart patterns can take a long time to come to fruition. I tend to exercise an itchy trigger finger to get involved when I see a weekly pattern developing. 2. Too many minor pattern signals—accepting patterns of lesser quality. The question I should always ask when looking at a minor pattern is: “Is the daily pattern I am considering one of the best two or three minor daily chart patterns in this market in the past year?” If the answer is no, then I should skip the trade. As a reminder, a minor signal in my approach is a chart configuration visible only on the daily graph without confirmation of any sort from weekly chart developments. As a general rule, a minor signal should be a minimum of four to eight weeks in duration for a continuation chart pattern and eight to 10 weeks in duration for a reversal chart pattern. 3. Lesser standards on major pattern pyramid signals within an ongoing major trend. I become too eager to pyramid a profitable trade. These three types of trading events can synergisticallylead to a temporary lack of confidence in my trading plan. My attitude coming into December was that I needed tobe choosier about the patterns I would trade. Instead ofidentifying 18 to 20 or so trades monthly, I needed toreduce the number of new trading events to around 13 to15. There is one other consideration I was taking intoaccount. December is often a tough month for trading.Large traders are reluctant to press their advantage onpositions as they face the holiday period. Volume begins todry up in mid-December. Holiday markets are notorious forrunning stops on both sides of the market in thin tradingconditions. This is an important fact because I normallyenter and exit trades using stop orders. This was the backdrop for the beginning of this book. Iwas thinking to myself: “Oh great, I am starting the tradingdiary right in the middle of my worst trading spell in quitesome time. And I am starting the diary in a month that hasgiven me fits over the years. Wonderful!” Trading RecordDuring December, I entered 13 new trading events in 12different markets. Two trades were carried as openpositions into January. EUR/USD: The First Trade of the Diary Period Signal Type: Major Completion Signal Throughout November and December I had watched theeuro/U.S. dollar (EUR/USD) with an interest toward theshort side. In fact, I had been whipped around in twoattempts to get short, one in early November and thenagain in mid-November. Figure 8.1 shows that the markethad developed a trend line from the March 2009 low.Normally, I do not trade trend-line violations. Trend lines fallinto a category of chart development I called diagonalpatterns. Yet, the mor ...